AUTUMN BUDGET 2021 ANALYSIS: Taxing times as Chancellor Rishi Sunak eyes election war chest
When Boris Johnson won the election by a landslide nearly two years ago, he promised a low tax era.
The ‘tax guarantee’ in the Conservatives’ 2019 manifesto was clear as day, stating ‘we promise not to raise the rates of income tax, National Insurance or VAT’.
A lot has changed since then. No one could have seen the coronavirus pandemic coming. But many have been shocked by the speed with which the Tories have broken their pledges.
To tackle the huge amount of spending related to coronavirus and balance the books, Chancellor Rishi Sunak has raised taxes to a level not seen since the 1950s when the UK was still recovering from the Second World War and the NHS was in its infancy.
It also means that taking his March and October budgets together, Sunak has raised taxes by more this year than in any single year since Norman Lamont and Ken Clarke’s two 1993 Budgets in the aftermath of Black Wednesday. The tax rises have led to fears that this Conservative government has left behind the party’s small state, low tax past and is too comfortable with turning on the taps.
Worried the accusations are starting to stick, Sunak yesterday promised that by the end of the Parliament the Government would be cutting taxes.
To prove he is, at heart, a low tax Chancellor, there were tax cuts on universal credit, alcohol and a business rate discount for hospitality, retail and leisure.
But these followed three whopping increases in taxes already announced – the corporation tax hike and freezing of income tax allowances in March and the rise in national insurance contributions announced in September.
Andrew Bridgen, MP for North West Leicestershire, said: ‘A country can’t tax itself to prosperity.’
But economists believe there are signs Sunak is preparing a war chest for voter-friendly tax cuts before the next election. Under his new fiscal rules, he is on course to have £25billion, according to the OBR’s own projections.
In the meantime though, the higher tax burden will hurt. The tax rises began in March last year when the planned cut in corporation tax from 19 per cent to 17 per cent was ditched. This was followed up in the March 2021 Budget with the announcement that corporation tax would in fact rise to 25 per cent in April 2023.
The OBR estimates that these two moves will generate £25.7billion in extra revenues in 2025-26, a huge tax hike on British business.
The raid on business came alongside a stealth tax on millions of workers as income tax thresholds were frozen. Instead of rising each year, the point at which the 20 per cent rate of income tax kicks in was pegged at £12,570 until the middle of the decade. The OBR estimates an extra 1.3m people will start to pay income tax by 2026 as a result of the freeze.
The threshold for paying the higher 40 per cent rate of tax was also frozen at £50,270, dragging an extra 1m into the band within five years. This was followed in September by the health and social care levy of 1.25 per cent on employers, employees and the self-employed.
In total the levies will raise a whopping £54.6billion a year by 2026.
Business feels particularly aggrieved by the tax rises and have never fully trusted Johnson. Back in 2018, when asked about corporate concerns over a so-called hard Brexit by Belgium’s ambassador Rudolf Huygelen, Johnson was overheard saying: ‘F*** business.’
Luke Johnson, serial entrepreneur and former Pizza Express chairman, said: ‘This is not a Tory government we have seen before.
‘This is a high tax, high spend government and the fear is they’ve only just started.’
Among Tory backbenchers, the fear is that the tax rises, along with a hike interest rates, could throttle the UK’s recovery.
But others in the Party are more sanguine and believe Sunak and Johnson will return to traditional Tory economics once the worst of the pandemic has passed. Former Tory leader Iain Duncan Smith said: ‘I think we’ll head into the next election with tax cuts, not rises. These are short term measures.’
The OBR predicts that the Budget will be in surplus to the tune of £12.5billion in 2023-24 and £25.1billion in 2024-25.
‘This would give the Chancellor room to either increase spending or perhaps more likely cut taxes ahead of the next election,’ said Neil Shearing, chief economist at Capital Economics. ‘Viewed this way, it’s difficult to escape the feeling that this was a Budget designed to meet political rather than economic objectives.’